Association Agreement in the Transnistrian Region: Mission Possible?

Executive Summary

The implementation of the AA/DCFTA in the Transnistrian region is crucial at least for two reasons: (i) political - it could serve as a strong precondition for converging the economies from both sides of Nistru and reintegration of the country; and (ii) economic – it offers additional opportunities to export, attract FDI and set the economy on a sustainable path, which are vital elements for the Transnistrian region with dwindling economy and skyrocketing budgetary and current account deficits. According to some estimations, the implementation of AA/DCFTA will bring net benefits to the Transnistrian region, permanently boosting its economy by about 3-4%[1].

The Transnistrian region could lose the AA/DCFTA opportunities at the beginning of 2016, when the current Autonomous Trade Preferences granted by EU will expire, being replaced by MFN import tariffs. Thus, if the region will not implement at least the minim requirements of the AA/DCFTA, it could lose the preferential access to the EU market, cause a permanent 5% decline in its GDP. As the time passes, this scenario becomes more and more realistic, because so far the authorities did not agree on a clear mechanism about AA/DCFTA implementation in the Transnistrian region.

The approach in persuading the Transnistrian authorities to implement AA/DCFTA should be based on five key peculiarities of the region’s economy. These peculiarities allow for better understanding the incentives that drive the reluctance of the region’s authorities to implement AA/DCFTA and, therefore, should be taken into account by Chisinau and Brussels authorities:

Although, the region depends on the EU Market for exports, it is much more reliant on imports from Russia;

The region’s economy is not self-sufficient –the huge current account deficit is financed, directly and indirectly, from Russia;

The region’s economy depends more on domestic demand, fueled primarily by “Russian money”, rather than on EU-driven foreign demand;

The region’s budget is very exposed to foreign trade liberalisation, causing immediate budgetary costs as a result of removing customs’ tariffs.

The region is running out of international reserves, the “rubble” being backed heavily by “Russian money”.

These five key peculiarities of the Transnistrian economy reiterate the well-known fact: Russia has a strong leverage in the Transnistrian region, whereas the leverage of Chisinau and Brussels is relatively weak. It has obvious consequences on the behaviour of region’s decision-makers, as well as the preferences of the most of its population, which transposes into a strong EU scepticism in the region. These feelings are fuelled by the fact that the Transnistrian economy is constructed in the way that AA/DCFTA could generate large immediate costs (e.g. decline in budget revenues, competitiveness shock), whereas the main benefits are expected for the long run and remain uncertain.

Hence, AA/DCFTA implementation in the region could be “mission possible” if and only if answers to three crucial questions will be found:

How to ensure a constructive dialogue given EU-skeptical attitude in the region?

How to downsize the immediate costs of trade liberalization?

How to mitigate the uncertainty about medium and long-term opportunities of AA/DCFTA for the region? The approach towards AA/DCFTA implementation in the region should be based on the answers to these three questions.

How to ensure a constructive dialogue given the EU-skeptical attitude in the region? The dialogue between Chisinau and Tiraspol should be completely freed of “sensitive terminology” (e.g. AA/DCFTA, EU, European integration or trade liberalization etc.). At the same time, it is necessary to concentrate on a clear roadmap about the implementation of the most basic technical requirements that, on the one hand, should make the firms from the left-bank of Nistru eligible for the preferential access to EU, and on the other hand should not be perceived as part of the DCFTA commitments.

How to downsize the immediate costs of trade liberalization? Although, the AA/DCFTA implies a gradual removal of imports duties of Moldova, with transition periods ranging from 3 to 10 years for the most sensitive products, for the Transnistrian firms the liberalization schedules should be extended even further. The reason lies in the fact that the region’s economy is much more exposed to trade liberalization compared to the rest of the country (due to much higher import duties and their significant share in the region’s budget).

Hence, it is necessary to allow longer transition periods for the most sensitive sectors of the region’s economy (textiles, footwear, leather, live animals and products of animal origin). Obviously, this liberalization slowdown should not generate moral hazards for the Transnistrian policy-makers, being conditioned by closer cooperation between Tiraspol and Chisinau authorities on issues related to verification of rules of origin, customs clearance for goods entering and coming out of the region, and implementation of EU quality standards. Moreover, the Transnistrian authorities should implement a structural fiscal reform in the region, that would be supported by the key development partners of Moldova and would consist of two important elements: (i) implementation of a transparent and simple VAT system; and (ii) improvement in the compatibility between fiscal systems on both banks of Nistru and aligning them to international standards.

How to mitigate the uncertainty about medium and long-term opportunities of AA/DCFTA? It is necessary to concentrate mainly on tangible and immediate benefits and opportunities of the association agenda. Some of them could be the Program of Competitiveness of Enterprises and Small and Medium-sized Enterprises 2014-2020 (COSME), Enterprise Europe Network, Erasmus for young entrepreneurs and the financing agreement in agriculture and rural development – ENPARD. Additionally, a platform could be created, comprising non-political policymakers and SME representatives from both sides of Nistru to discuss feasible mechanisms of extending EU programs in the Transnistrian region and increasing the level of information and awareness about these programs in the region.

In conclusion, the implementation of the AA/DCFTA in the Transnistrian region is conditional on the mutual compromise between Chisinau/Brussels and the region’s authorities. We believe this is the most realistic approach that takes into account the special statute of the region, as well as the peculiarities of the Transnistrian economy. The reality is that the Russian influence in the region is too strong for the “all-or-nothing” rhetoric regarding the AA/DCFTA implementation in the region. Failure to accommodate to this reality could turn into further economic and political isolation of the region, with major economic and social repercussions for the local firms and population, for whom the government of the Republic of Moldova is responsible, both from the constitutional and moral points of views.

[1] The Impact of the EU-Moldova DCFTA on the Transnistrian Economy: Quantitative Assessment under Three Scenarios”, Berlin Economics and Expert-Grup, 2013

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This publication is produced within the project “Understanding the EU’s Association Agreements and Deep and Comprehensive Free Trade Areas (DCFTAs) with Ukraine, Moldova and Georgia”, led by Centre for European Policy Studies (CEPS) in Brussels, in partnership with Expert-Grup (Moldova), Institute for Economic Research and Policy Consulting (Ukraine) and Reformatics (Georgia), with the financial support of the Swedish International Development Cooperation Agency (SIDA).

Opinions expressed in this document belong to the authors and do not necessarily reflect the opinions of CEPS and SIDA.

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